The European Commission instructs ESMA on definition of FX contracts


As the European Commission continues to implement its regulatory reforms for OTC derivatives, Steven Maijoor, Chairman of the European Securities and Markets Authority has received a letter from Jonathan Faull, the Director General for the Internal Market and Services at the European Commission regarding the clarification and definition of a financial instrument relating to foreign currency (FX contract).

The instructive letter from the European Commission’s purpose is to draw to Mr. Maijoor’s attention that Omnibus I (Directive 2010/78/EU) introduced a sunset clause in Article 64a of MIFID 1 which provides that “the powers conferred on the Commission in Article 64 to adopt implementing measures that remain after the entry into force of the Lisbon Treaty on December 1, 2009 shall cease to apply on December 1, 2012.”

On this basis, the European Commission has ruled that it will therefore not be possible to address this issue by way of a MIFID 1 implementing measure. A consistent interpretation remains necessary, in particular to ensure the effective application of the reporting regime under Regulation (EU) No 648/2014 (EMIR).

Previously, LeapRate had reported that Mr. Maijoor inferred in April this year that FX trades may escape clearing requirements under the new rulings, insofar that FX trades that are classified as being derivatives will have to be reported, but there will be no clearing requirement. This has yet to be concluded.

However, it was pointed out to Mr. Maijoor that it should also be appreciated that Directive 2014/65/EU (MIFID II) and its associated implementing measures will come into application on January 3, 2017. These level 2 measures can provide legal certainty on what an FX contract is.

Mr. Maijoor has been informed as a senior regulatory official that the European Commission suggests that ESMA carefully considers whether the current approach by European Union Member States achieves a sufficiently harmonized application of the EMIR reporting obligation in the period before application of MIFID II or whether further measures by ESMA, e.g. guidelines, are necessary.

However, a proportionate approach requires consideration that any measures or guidelines that are adopted now, and might require changes by Member States to legislation and by stakeholders to their practices and authorizations, may need to be changed again in 2017 if these measures are not fully aligned with the future MIFID II implementing measures.

Mr. Faull concluded by stating that whilst the European Commission cannot pre-judge MIFID II implementing measures, the question of how to define a FX contract has already been extensively discussed during the public consultation and in two meetings under the European Securities Committee.

He continued to inform Mr. Maijoor that a broad consensus seems to have been reached along the following lines with respect to defining FX spot contracts:

• To use a T+2 settlement period to define FX spot contracts for European and other major currency pairs (Euro, Croatian kuna, Bulgarian lev, Czech koruna, Danish krone, Hungarian forint, Polish zloty and Romanian leu (EU Member States currencies), US dollar, Japanese yen, Australian dollar, Swiss franc, Canadian dollar, Hong Kong dollar, New Zealand dollar, Singapore dollar, Norwegian krone and Mexican peso (Bank for International Settlements most traded currencies)).

• To use the “standard delivery period” for all other currency pairs to define a FX spot contract.

• Where contracts for the exchange of currencies are used for the sale of a transferable security, to use the accepted market settlement period of that transferable security to define a FX spot contract, subject to a cap of 5 days.

• A FX contract that is used as a means of payment to facilitate payment for goods and services should also be also considered a FX spot contract.

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The European Commission instructs ESMA on definition of FX contracts

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